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The U.S. dollar was trading higher Monday against the euro and pound, as the currency looked set to extend a recent comeback after Friday’s employment data indicated a pickup in stubbornly low wage growth, which could lead to inflation.

Fears of a return of inflation sent assets perceived as risky sharply lower Friday. That’s because inflation risks imply that the Federal Reserve may have to raise interest rates at a faster pace than the three or four hikes the market has priced in — a boon for the greenback, but a short-term negative for stocks as borrowing costs look set to rise.

What are currencies doing?

The ICE U.S. Dollar Index
DXY, +0.11%
a measure of the currency against a basket of six major rivals, rose 0.4% to 89.556. Friday’s gains were the best for the dollar since late October, according to FactSet data.

The wider WSJ Dollar Index
BUXX, +0.07%
, which gauges the buck against 16 rivals, was up 0.2% at 83.75, after hitting its lowest level since Dec. 30, 2014, late last week.

The euro
EURUSD, -0.1384%
on Monday slipped to $1.2392, compared with 1.2459 late Friday in New York. The euro rose 0.4% on Friday but registered a 0.3% weekly advance against the buck.

The pound
GBPUSD, -0.2658%
declined to $1.3978 — a two-week low — versus $1.4119 in the previous session. On Friday, the buck surged more than 1% against sterling, lifting it to a weekly rise of 0.3%.

Against the Japanese yen
USDJPY, -0.19%
, the dollar sold off to ¥109.12, compared with ¥110.15 late Friday. Japan’s currency is perceived as a safe haven from market turbulence and tends to strengthen in times of trouble. The U.S. dollar registered a 1.4% weekly climb against Japan’s monetary unit, with about half of that advance, 0.7%, coming on the last session of the week.

As for North American currencies, against Canada’s dollar
USDCAD, -0.0079%
one buck bought C$1.2525, versus C$1.2429 on Friday, while against Mexico’s peso
USDMXN, -0.0403%
a buck changed hands at 18.7990 pesos Monday, compared with 18.5948 pesos in the previous session.

What’s driving the market?

The U.S. currency has benefited from a decline in equities, notably a slump in the Dow Jones Industrial Average
DJIA, -0.67%
, which finished Monday with the biggest one-day drop in its history, and the S&P 500 index
SPX, -0.55%
. This threatens to upend what has been a mostly protracted period of calm in surging risk assets. However, rising inflation worries imply that the buck might benefit from higher rates in the future, while the currency also is drawing some flight to assets perceived as safe during a global equity reversal.

Stocks sold off sharply on Friday after the nonfarm-payrolls report showed 200,000 new jobs added, beating the MarketWatch consensus estimate of 190,000, while wage growth hit an 8½-year high.

Part of the disruption in the trend for stocks and the broader market derives from a climb in yields. The yield on the 10-year Treasury note
TMUBMUSD10Y, -0.49%
briefly topped 2.88%, building on the four-year yield peak for the benchmark hit on Friday. Higher yields can undermine appetite for assets that offer low or no yields. In theory, however, a richer coupon for government paper should ultimately drive appetite for the greenback, with currency traders tending to want to park their funds in places with the highest yields.

Elsewhere, the British pound was faced with a data disappointment as the U.K. purchasing managers index for services slipped to 53 in January, marking its lowest reading in 16 months, and indicating that the “U.K. economy is slowing across the board,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management.

The European Central Bank’s president, Mario Draghi, meanwhile said during a speech at the European Parliament that the recent volatility in the euro’s exchange rate warranted monitoring. Draghi had previously made similar remarks about the shared currency’s strength, but then as on Monday, the currency reacted rather little to it.

What are strategists saying?

“The significant development over the past few weeks has been the recovery in volatility. In the past month, the VIX marked the sharpest spike since the US election,” said Mark McCormick, North American Head of FX strategy at TD Securities. “Foreign exchange vols have started to take notice as well, with high-beta currencies leading the move lower over the past week. The sell-off in rates has begun to dent sentiment, which is bleeding into equities and risk appetite.”

“The recent rise in risk aversion clearly threatens to break the fall in the dollar. However, we believe that other currencies, such as the yen, Swiss franc and even the euro might prove more of a safe haven than the dollar,” wrote Steve Barrow, currency and fixed-income analyst at Standard Bank.

“We look for 10-year yields to end the year at 3.25% so, for the moment at least, we are not panicking that the recent rise in yields might turn into some sort of uncontrollable rout in Treasurys,” he said.

What did the data say?

Markit’s January reading on a purchasing managers index came in at 53.3, compared with 53.7 in the month prior.

The Institute of Supply Management nonmanufacturing index for the same month jumped to 59.9%, exceeding both the MarketWatch consensus estimate of 57% and the 56% level from the previous period. This puts the datapoint at its best level since mid-2005. A reading of at least 50 indicates improving conditions.

Which other assets are in focus?

South Africa’s rand was strengthening against the U.S. dollar, even after the country’s leader, Jacob Zuma, who is facing corruption allegations, defied his party’s request to step down, according to reports. Those reports said the African National Congress has held talks in recent days about a transition of power.

One dollar last bought 12.1210 rand
USDZAR, +0.2821%
, down 0.3%, according to FactSet data.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.